Venkataramaiah, J.:— The question referred to us in the above case by the Income-tax Appellate Tribunal, Bangalore Bench, under s. 256(1) of the I.T Act, 1961, hereinafter referred to as “the Act”, is whether, on the facts and in the circumstances of the case, a sum of Rs. 2,98,657 was rightly assessed as long-term capital gain Briefly stated, the facts of the case are as follows:
The assessee is M/s. Kirloskar Asea Ltd., a public limited company registered under the Indian Companies Act and carrying on business at Bangalore. The assessment year is 1971–72, the relevant previous year being the year ending 30th September, 1970. The assessee had entered into a collaboration agreement dated August 21, 1964, with Alimanna Svenska Elektriska Aktiebolaget, hereinafter referred to as “ASEA”. The said foreign collaborator contributed towards the share capital of the asses-see-company a sum of Rs. 12,00,000 against which it was allotted 12,000 shares of the assessee-company. This sum was paid in foreign exchange, i.e, dollars, and in terms of dollars, it came to f 2,52,026. This sum was credited by the assessee in a Swedish bank in its own name for the purpose of acquiring machinery with the permission of the Government of India. It could, however, use only a part of it for importing machinery. After paying for such machinery, during the relevant accounting year $1,10,534 was available in the account of the assessee in the Swedish bank. This sum was repatriated to India with the permission of the Reserve Bank of India during the year under consideration. When the dollars in question were acquired in or about the year 1964, a dollar was worth Rs. 4.76 But on account of devaluation of the Indian rupee which took place on June 6, 1966, the value of dollar in terms of rupee went up and on the date of repatriation, one dollar was worth Rs. 7.50 Consequently, in terms of rupees, the assessee got Rs. 2,98,657 more than what it would have got had the foreign currency in question been repatriated at the time of its acquisition. The ITO treated the sum of Rs. 2,98,657 as long-term capital gain and brought it to tax under the provisions of the Act. The appeal filed by the assessee against this part of the assessment order before the AAC of Income-tax and the Tribunal were unsuccessful. Hence, this reference at the instance of the assessee.
2. On behalf of the assessee, it is argued by Sri G. Sarangan that the amount of $1,10,534 was not a capital asset but was money and, therefore, no question of earning profit by selling it or by transferring it could arise in the circumstances of the case. We cannot subscribe to the above view put forward by the assessee. The expression “foreign exchange” is denned in the Foreign Exchange Regulation Act, 1947, by s. 2(d) thereof, as foreign currency and includes all deposits, credits and balances payable in any foreign currency, and any drafts, traveller's cheques, letters of credit and bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency. Indian cufrency is denned by s. 2(g) thereof as currency which is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under s. 28A of the Reserve Bank of India Act, 1934.
3. For all intents and purposes, foreign currency is in the nature of a commodity which can be converted into local currency by selling it. Our view receives support from the language adopted by Lord Greene M.R in Imperial Tobacco Co. (of Great Britain and Ireland) Ltd. v. Kelly (H.M Inspector of Taxes), [1943] 25 TC 292 (CA). In that case, the learned Lord held that the U.S Dollars held by a British company constituted commodity. The relevant part of that decision at page 300 reads as follows:
“We have here a finding of fact as to the purpose for which the dollars were bought. The purchase of the dollars was the first step in carrying out an intended commercial transaction, namely, the purchase of tobacco leaf. The dollars were bought in contemplation of that and nothing else. The purchase on the facts found was, as I say, a first step in the carrying out of a commercial transaction, which would be completed by the purchase and delivery of the leaf and payment of the dollar purchase price for it.
4. We must decide this case having regard to the facts as found. In the light of those facts, the acquisition of these dollars cannot be regarded as colourless. They were an essential part of a contemplated commercial operation.
5. That being so, what is the true analysis of the position? A manufacturer has provided himself with a commodity, namely, dollars. I call dollars a commodity not for the reason that they are not currency in this country, but because they have a characteristic which is common to other commodities, and is not shared by sterling, namely, that their value from day to day varies in terms of sterling, just in the same way as coal, or bricks, or anything else may do.
6. The appellant-company having provided themselves with this parti cular commodity, which they proposed to exchange for leaf tobacco, their contemplated transactions became impossible of performance, or were not in fact performed. They then realised the commodity which had become surplus to their requirements. When I say surplus to their requirements, I mean surplus to their requirements for the purpose and the only purpose for which the dollars were acquired.”.
7. The expression “capital asset” for the purpose of s. 45 of the Act is defined in s. 2(14) of the Act and the relevant part of that definition reads as follows:
“2. (14) capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include—……”
8. The dollars in question which were repatriated to India being the property of the assessee, constituted capital asset of the assessee on the facts and in the circumstances of the case and any profit derived on account of its transfer has to be treated as capital gain, since it cannot be disputed that the assessee was able to acquire Indian currency only by, transferring the said capital asset in question as denned in s. 2(47) of the Act. This view is in accordance with the decision of the Supreme Court in Sutlej Cotton Mills Ltd. v. CIT, [1979] 116 ITR 1, in which it is held as follows (p. 13) i
“The law may, therefore, now be taken to be well settled that sphere profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the, foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. The Tribunal was, therefore, right in holding that the dollars in question constituted capital asset and the profit of Rs. 2,98,657 made by the assessee was capital gain liable to be taxed under the Act.
9. The question referred to us is, therefore, answered in the affirmative and against the assessee.